Why NPEs Lose Less Often in Court Than Operating Companies
|Written by Robert P. Greenspoon
Flachsbart & Greenspoon, LLC
Posted: February 25, 2014 @ 10:59 am
EDITORIAL NOTE: The Author will present these findings on February 28, 2014 at the 58th Annual IP Conference at the John Marshall Law School in Chicago, Illinois.
Anti-patent groups who seek to diminish patent rights have turned the public’s imagination against licensing entities. Sometimes called NPEs or PAEs, sometimes called an epithet that need not be repeated here, such licensing entities do not practice the patent rights that they seek to license out. For now, let’s call them monetizing companies. I have previously written about the economic utility that monetizing companies bring to the patent system, and to the overall economy. As a general matter, they ensure that patents achieve their uses to promote technology transfer, promote commercialization of marketable ideas, and enable securitization of intangible assets to facilitate startup financing.
The anti-patent forces have convinced many members of the public – and their representatives in Congress – that such patent monetizing companies “abuse” the court system. But what do the data say?
If monetizing companies as a class “abuse” litigation more often than plaintiff operating companies, we would expect to see data that show that they bring less meritorious patent cases. Some have sounded the alarm that such data already exists. They cite to the annual PricewaterhouseCoopers report on patent litigation. But is this a reliable source for this conclusion?
The chart to the left, which is Chart 5b from page 12 of the latest PwC report released in 2013, appears to show comparative “success rates.” The chart appears to answer the question negatively for monetizing companies. As depicted in the chart, operating companies seem always to have had a higher “success rate” in court compared to monetizing companies, most recently 38% compared with 26%. That is, in fact, how alarmists (including those at the highest levels of government who advise the present Administration) have used these statistics. Examples are everywhere. Here are four notable ones:
“8. PAEs are Less Successful than Practicing Entities in Litigation
PwC’s excellent annual litigation report is chock full of statistics about patent litigation and in particular, with respect to NPEs, that: they look to . . . a lower than practicing company success rate (34% practicing co v. 23% NPE) that is declining (Chart 5B).”
Colleen Chien, White House’s Office of Science and Technology Policy (OSTP), Patent Trolls by the Numbers (March 14, 2013).
“For instance, the PricewaterhouseCoopers, 2011 Patent Litigation Study shows that PAEs are successful in just 23% of litigation, and even less successful in certain industries including business/consumer services, software, and telecommunications.”
David A. Balto, Comments of Food Marketing Institute and the National Restaurant Association to the Federal Trade Commission and U.S. Department of Justice on Patent Assertion Entities, at 2 (Apr. 3, 2013)
“While non-practicing and practicing entity success rates were very close to each other in the 2001-2006 time period (28% vs. 33%), they diverged in the 2007-2012 time period (25% for NPE’s vs. 38% for non-NPE’s) due largely to an increase in the number of NPE cases disposed of by summary judgment.”
Prepared Judiciary Committee Statement of Philip S. Johnson, Chief IP Counsel, Johnson & Johnson, at 12 (Dec. 17, 2013) (quoting PwC 2013 Study).
“Trolls Wither on the Papers. Trolls and practicing plaintiffs are equally successful at trial, but practicing entities are much more successful winning on summary judgment.”
R. David Donaghue, Partner at Holland & Knight, Patent Litigation Strategies for Retailers Based Upon the PwC Patent Litigation Study, Patent Law Practice Center Website (Nov. 7, 2011).
Unfortunately for the cause of rational discourse, commentators and government advisors have overlooked that these statistics do not, in fact, report the “success rates” that most people think they do. For example, here is the relevant “methodology,” taken from the PwC report itself (page 34):
To study the trends related to patent decisions, PwC identified final decisions at summary judgment and trial recorded in two WestLaw databases, U.S. District Court Cases (DCT) and Combined Jury Verdicts and Settlements (JC-ALL), as well as in corresponding Public Access to Court Electronic Records (PACER) system records. The study focuses on 1,856 district court patent decisions issued since 1995. Definitions for important terms used throughout the study are listed here:
A success included instances where a liability and damages/permanent injunction (if included) decision was made in favor of the patent holder.
It is plain to see that the PwC methodology is full of holes. PwC’s pool of cases is limited to actual trials or patentee-initiated summary judgments. In other words, the “denominator” of their rate calculation is (a) all trials plus (b) all summary judgments sought by the rights holder. The numerator is the quantity of these where the rights holder won.
What is missing here? Settlements. PwC does not collect or code any statistics to determine the quantity, quality or rate of settlements. In many cases, rights holders view settlements as touchstones of success. So why does this matter?
I assert that, using currently-available data, it is not possible to proclaim with any credibility that monetizing companies “succeed” at litigation less often than operating companies. I even assert that it is not possible to assert the contrary proposition, that they succeed more often. We simply do not know. The absence of data that characterize settlements makes this impossible. Policy makers should be skeptical of anyone who claims that current data (especially PwC’s data) reveal the answer.
I do propose, however, that there is a better metric. This is based on my experience as a licensing and trial attorney. It looks at the problem from the other direction. I propose that if any comparison is made at all, we should look at patentee loss statistics. Patentee loss statistics are much more likely to allow a comparison between monetizing companies and operating companies, and the cases they bring.
Why is this? Two reasons. First, imminent patentee merits victories will get vacuumed into the settlement category. The old litigator’s aphorism comes to mind – good cases settle, bad cases get tried (at least from the patentee’s perspective). There is no way to tell if that happens more for one class over the other. And second, trial and patentee-initiated summary judgment proceedings are a tiny statistical blip. It turns out that in terms of quantity, there are about ten times more defense merits wins than patentee merits wins among all cases that get litigated and do not settle. The explanation for this is simple – a patentee does not have to “win” to succeed – it only has to settle on monetary terms that it can convince an opponent to give.
One special case deserves mention: when the defense seeks but fails to win on summary judgment. The PwC data are blind to this phase of a typical patent case. This time is often when monetizers finally convince a defendant to pay. This phase of a case presents a powerful negotiating position for a monetizer-patentee, compared with an operating company-patentee. Monetizers have no competitive need to proceed to trial, but operating companies might (perhaps to get an injunction against a competitor).
A recent scholarly work reveals the truly revealing statistics: Robin Feldman, Tom Ewing & Sara Jeruss, The AIA 500 Expanded: The Effects of Patent Monetization Entities, UC Hastings Research Paper No. 45, (April 9, 2013). Feldman, Ewing & Jeruss performed high granularity coding of patent litigation outcomes based on cases filed in two periods: 2007-2008 and 2011-2012. Outcomes fit into one of the following “buckets” per case (p.85):
Of the potential outcomes, settlement dwarfs all others. Indeed, the researchers note that given how many lawsuits settle, the remaining numbers are too small to reach definitive conclusions and are only useful as observations. Of the rest, only the following “buckets” indicate a defense victory on the merits:
Procedural – Dismissal
Claim Defendant Favored in Consent Judgment
Claim Defendant Win – Judgment on the Pleadings
Claim Defendant Win on Summary Judgment
Claim Defendant Win at Trial
Claim Defendant Win on JMOL
It is eye opening to add up the percentages for the respective entries. Doing so allows some stunning observations:
|Procedural – Dismissal||4.29%||3.20%|
|Claim Defendant Favored in Consent Judgment||0.32||0.46|
|Claim Defendant Win on Pleadings||0.02||0|
|Claim Defendant Win on Summary Judgment||1.59||1.89|
|Claim Defendant Win at Trial||0.57||0.29|
|Claim Defendant Win on JMOL||0.04||0.04|
|Compare with “Likely Settlement” Rates||71.94%||74.44%|
These data allow observations completely at odds with the PwC reports. These data show that, if anything, monetizers lose less (5.88% compared to 6.83%, a difference of 14%) and settle more (a difference of 3.5%) compared to operating companies. PwC’s results ignore that 70-75% of patent cases settle, and do not account for the opposite comparison-conclusion shown by the “defense merits wins” metric (i.e., that monetizers perform 14% better in court than operating companies).
There are other reasons to question why policymakers rely on the PwC results. PwC reports do not explain their coding methodology (whereas Feldman, Ewing & Jeruss do). PwC also shows some surprising and unexplained year-over-year changes to their reported data. For example, PwC’s charts from 2010 to 2011 ought to show identical prior-year data. But they do not. They instead show sharp changes. Take note of Year 2004 patent holder success rates:
2010 Study (page 15)
2011 Study (page 17)
As can be seen, according to the 2010 study, monetizing companies appear to have a higher “success rate” for the year 2004 than operating companies. But in the 2011 study, the charts show a reversal for 2004. Why do the data change so much, for a year that was long past? The reports contain no explanation.
There is a second strange leap. From 2011 to 2012, PwC reports the overall “success rate” in a shifting way. In 2011, the study reports it on an individual year-by-year basis (see chart mentioned immediately above). But starting in 2012, the study reports it in arbitrary 6-year groupings (see left).
Is it possible that someone did not like these charts being used to show how many years monetizing companies had a higher “success rate” than operating companies (i.e., 2002, 2003, 2008 and 2009, even ignoring the 2004 turnabout)?
In short, no one can definitively say whether monetizers bring better cases (or worse cases) than operating companies. But if the data support any conclusion, they support that monetizers bring more meritorious cases than operating companies (i.e., they lose on the merits less often), and act more successfully to unclog them from court dockets (i.e., they settle more often).
Be skeptical, and think critically, when you see biased advocates quoting the PwC Reports.
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About the Author
Robert Greenspoon is a founding member of Flachsbart & Greenspoon, LLC. He is a registered patent attorney who concentrates his practice in the litigation and trial of patent cases involving computer and electronic technologies.
Mr. Greenspoon has argued several cases before the Court of Appeals for the Federal Circuit. He argued the winning appeals in 1st Media, LLC v. Electronic Arts, Inc., et. al. (Federal Circuit, Appeal No. 2010-1435, September 13, 2012), HyperPhrase v. Google (Federal Circuit, Appeal No. 2007-1125, -1176, December 26, 2007), and 1st Technology v. Bodog (Federal Circuit, Appeal No. 2008-1132). At 29 years old, he became possibly the youngest attorney to argue successfully for a patentee-appellant in a multimillion-dollar patent case, in IMS Technology, Inc. v. Haas Automation, Inc., 206 F.3d 1422, 1430 (Fed. Cir. 2000).>